Supply-Side Buffers are Scarce as War Ramps Up

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

The weekend saw rekindled military action in the Middle East that continues to create problems in the global energy sector. Supply-side buffers are scarce, however, and mismanaged in some cases.

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Oil Up on Renewed Middle East Tensions

Crude oil prices were notching gains early Monday amid renewed tensions in the Middle East, with a U.S. government watchdog agency warning of the lack of supply-side buffers.

Industrial Info Resources continues to monitor developments in the Middle East. It was reported early Monday that the Amir Kabir Petrochemical Company has further delayed the restart of its Bandar Imam Petrochemical Complex in Iran following an April drone attack linked to the ongoing Middle East conflict.

That follows an uptick in the fighting. On Saturday, the United Kingdom Maritime Trade Operations Center reported an oil tanker was hit by an unidentified projectile while traversing the Strait of Hormuz.

The vessel sustained damage to its bridge, though no injuries were reported and there was no environmental damage. That followed U.S. retaliatory strikes on Iran in response to Iranian attacks on Omani interests late last week.

The price for Brent crude oil, the global benchmark, lost 9.3% last week amid tentative signs of a breakthrough in peace negotiations to end a conflict that's upended the global economy. With renewed fighting during the weekend, Brent was up nearly 2% in mid-day trading to move near $74 per barrel, more than a dollar more than last week's low.

Supply-Side Cushions at Risk

The International Energy Agency (IEA) noted that shipments of crude oil through the Strait of Hormuz, closed at times during the fighting, increased sharply in early June, but warned market recovery would not be immediate.

"Producers outside the Middle East have also pushed output higher and lifted exports to record levels in response to the crisis," the agency said. "Even so, supply losses stemming from the Middle East disruptions have depleted global oil inventories at the fastest pace on record."

Industrial Info Resources in its weekly review of U.S. energy market activity reported crude unit outages increased 112,000 barrels per day (bpd) week-on-week, with only the Rocky Mountains region spared by major disruptions. Elsewhere, the amount of crude oil in the Strategic Petroleum Reserve (SPR) declined by 2.6% week-on-week over the seven-day period ending June 19 to 331.2 million barrels, less than half of its full capacity.

That aligns with IEA warnings about the lack of supply-side buffers. In the United States, the non-partisan Government Accountability Office cautioned that the strategic reserve was mismanaged.

"The SPR's operational capability to meet mission demands is at risk," a recent report read.

In coordination with the IEA, the U.S. SPR began in 1975 in response to an Arab oil embargo imposed to counter U.S. support for Israel. Its full capacity is 714 million barrels. According to the GAO report, a drawdown of 180 million barrels in response to the initial Russian invasion of Ukraine in 2022 was the largest ever, testing the reserve's capabilities.

In March, the U.S. tapped 172 million barrels to offset supply-disruptions that began with a war triggered by joint U.S.-Israeli airstrikes in late February.

The GAO said Congress has repeatedly drafted reviews but failed to recommend actions to ensure the SPR serves its purpose. The accountability office called for mandated reviews, limits to non-emergency drawdowns and more funding.

"Investments in the SPR are again not keeping pace with the aging reserve's needs, resulting in a growing backlog and looming operational limitations," the GAO's report read.

By the Numbers

• 2% jump in Brent after weekend attacks
• 2.6% week-on-week drop in U.S. strategic reserves

Key Takeaways

• Markets on edge amid renewed Middle East conflict
• Supply-side cushions are depleted

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About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 trillion (USD).